Sunday, October 11, 2009

How is Money Created and What Processes Explain its Circulations?

This is a great article by Alan Nasser that explains why the bailout (not stimulus) is mis-directed by unpacking how money and credit are created.

The issue of money creation may seem arcane and not particularly interesting. However, understanding money creation is critical to understanding whether the deficit matters or not. It is also critical to evaluating the relative effectiveness of different forms of government spending.

The problem with the current government approach is too much money is being directed at banks, which are not lending. Commercial banks are investing their money in stock markets and are paying their execs outrageous bonsues. Calculated risk and credit writedowns (2 internet sites) have chart after chart showing that banks are cutting consumer credit, rather than lending.

Households are abruptly being forced to repay debt under increasingly onerous repayment conditions. Banks are raising rates on credit cards before new rules regulating their behavior go into effect in 2010. Individuals are seeing their interest rates double on outstanding balances.

The lack of credit and the deteriorating repayment conditions are enriching banks and financial interests. They are also directly undermining the living conditions of middle-class and lower-class households.

The economy cannot "recover" under these conditions. Small businesses cannot get credit and individuals cannot consume enough to stabilize the collapse of retail products and services.

I highly recommend reading the article. Here is one of the conclusions derived from the analysis of credit creation and circulation:

"The state is now transparently -dare I say it- the executive committee of the ruling class, and is no longer governing in the interests of the industrial elite. It is the financial elite that conceives and often executes policy, and these fellows don’t depend on production and employment to make their fortune. They sell not widgets but debt, the most fitting product for a population consigned to perpetual austerity."

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